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Managerial Finance

ISSN : 0307-4358

Article publication date: 23 January 2007

This paper aims to briefly review principal theories of dividend policy and to summarize empirical evidences on these theories.

Design/methodology/approach

Major theoretical and empirical papers on dividend policy are identified and reviewed.

It is found that the famous dividend puzzle is still unsolved. Empirical evidence is equivocal and the search for new explanation for dividends continues. Also a number of stylized empirical facts about dividends discovered by researchers are noted.

Research limitations/implications

As with any review paper, the major limitation is that necessarily some papers will be left out. Also as newer research is published the review paper will become more dated.

Originality/value

This paper will give the reader a comprehensive understanding of the dividend puzzle and the major paradigms of dividend policy. The paper will also give the reader the major stylized facts about dividend policy.

• Corporate finance

Bhattacharyya, N. (2007), "Dividend policy: a review", Managerial Finance , Vol. 33 No. 1, pp. 4-13. https://doi.org/10.1108/03074350710715773

Emerald Group Publishing Limited

Copyright © 2007, Emerald Group Publishing Limited

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Dividend Policy and Its Impact on Firm Value: A Review of Theories and Empirical Evidence

The Empirical and theoretical research on dividend policy has produced an extensive volume of literature.The research are categorized into two different schools of thought, the first is that dividend policy of a firm has an impact on its value and the second is that dividend policy of the firm has no impact on firm value. Even after several years of research no consensus has emerged, and scholars do not even agree upon with the same empirical evidence. This study provides with a complete understanding of dividends and dividend policy by reviewing the theories and their explanations of dividend policy including both dividend relevance and irrelevance theory of Miller and Modigliani, tax-preference,bird-in-the-hand, clientele effects, signaling and agency costs hypotheses. This study also attempts to present the important empirical studies on corporate dividend policy. However, due to the continuing nature and extensive array of the debate about dividend policy which has hatched a vast amount of literature that grows by the day, a full-fledged review of all debates is not feasible.

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This study examines the possible effects of dividend policy on firm value. The study covers 10 quoted companies studied for the period of 1995 - 2015. In so doing, the methodology adopted is the ordinary least square regression analysis for primary data analyses and multiple regression analysis for the secondary data analyses with models MPS (Market Price per Share) as dependent variable, EPS (Earnings per Share) and DPS (Dividend Per Share) as independent variables. The study shows the relevance of dividend as a signaling model and proves that firm value is greatly influenced by dividend policy as far as public limited companies are concerned.

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The main purpose of this research paper is to find whether there is a relationship between the dividend policy and stock price. The dividend policy is a wide topic that requires a lot of extensive research and time in order to analyze everything because there are many several different theories, claims, concerns and suggestions regarding the dividend policy and its impact in the stock prices. However, this research will mainly focus in the most three prominent theories know as Bird-in-hands, Irrelevance of dividend policy and Relevance of dividend policy theory. In addition, the literature analysis will reveal how managers control their firm’s stock price value.

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The importance of dividend policy in the current business world of significant agency problems between the principal and agent cannot be over emphasized. Those saddled with the responsibility to oversee the affairs of the organization are confronted with the decisions to improve the firm value; such decisions bother on financing structure, investment in assets and dividend policy. Dividend policies are crucial aspect of organization management and it serves as a mechanism for rewarding owners of a company for their investment. According to Nssim and Ziv (2001) dividend policies provide a guideline for deciding dividend payments to shareholders dividend represents the return accruing to shareholders for investing in an organization in order to acquire stocks (Eriki and Okafor,2002) dividend policy on the other hand deals with the division of profit (Net) between shareholders. Financial performance on the other hand, can be viewed as how well a firm enhances its shareholders’ wealth a...

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Corporate governance and dividend policy of the US and Indian companies

• Published: 13 June 2021
• Volume 26 , pages 1339–1373, ( 2022 )

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• Sunaina Kanojia   ORCID: orcid.org/0000-0003-0376-6215 1 &
• Bunny Singh Bhatia   ORCID: orcid.org/0000-0002-1038-1412 2  

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The paper examines the relationship between corporate governance and dividend payout, using a sample of Indian and US listed firms. In contrast with the substitution hypothesis, but in line with the outcome hypothesis, this study documented that companies with good corporate governance pay higher dividends than companies with weak corporate governance. Specifically, board independence, board size and institutional ownership are the key corporate governance drivers of dividend payout in US firms, while none of the individual corporate governance parameters is significantly associated to dividend payout in for Indian firms. An investor can use this information to make an investment decision. Financial Regulators need to improve corporate governance framework to enhance the disbursement of dividend and mitigate the agency problem. Companies need to consider the signalling effect of dividend payments while framing their dividend policy in both countries.

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1.1 Overall model Indian companies

Jarque Bera Probability ability 0.47

1.2 Overall model USA companies

Jarque Bera Probability ability 0.698

1.3 Individual model of Indian companies

Jarque Bera Probability ability 0.00

1.4 Individual model of USA companies

Jarque Bera Probability ability 0.21

Appendix 2: Robustness and 2SLS model

2.1 tsls for indian companies.

Dependent variable: DPR

Instrumented: GOV

Instruments: CONST ROA PBR DE LNTA INDDIR INSTOWN DPR_1

Hausman test: χ 2 (1) = 2.9414 with P-value = 0.0863357

Sargan over-identification test: P(χ 2 (1) > 0.306551) = 0.579804

Weak instrument test: First-stage F-statistic (2, 188) = 12.5799; *** P value at 1% level of significance

2.2 TSLS for USA companies

Instruments: CONST INDDIR INST PBR DE ROA LNTA DPR_1

Robust (HAC) standard errors

Hausman test: χ 2 (1) = 4.82904 with P-value = 0.0279842

Sargan over-identification test: P-value = P(χ 2 (1) > 2.42432) = 0.119465

Weak instrument test: First-stage F-statistic(2, 217) = 14.2503, *** P value at 1% level of significance.*** P value at 1% level of significance

US Fixed-effects TSLS

Dependent variable: y

Endogenous: GOV

Instruments: INDDIR INST

SSR = 127,392, sigma-hat = 27.058 (df = 174), R 2  = corr(y, yhat)^2 = 0.288460

Wald χ 2 (6) = 75.3928 [0.0000]; *** p value at 1% level of significance

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Kanojia, S., Bhatia, B.S. Corporate governance and dividend policy of the US and Indian companies. J Manag Gov 26 , 1339–1373 (2022). https://doi.org/10.1007/s10997-021-09587-5

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Accepted : 02 June 2021

Published : 13 June 2021

Issue Date : December 2022

DOI : https://doi.org/10.1007/s10997-021-09587-5

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